Arinsos Window of Opportunity

Jos Sluys never wanted to be a farmer. Despite having grown up on his father’s cattle farm in Pepingen—a small town just six miles outside of Brussels, Belgium—Sluys says he always had bigger ambitions.

"The farm was just too small," he says.

Today, Sluys’ drive to be part of something bigger epitomizes the culture and strategy of his Brussels-based company, Arinso International.

Since its founding in 1994, Arinso has evolved from an SAP implementation specialist to one of the only global payroll providers in the world, with 2,500 employees in 26 countries.

But what put Arinso on the map is its partnerships with HRO providers. These agreements have enabled the company to become a player in some of the largest HRO deals ever. Most notable is Accenture’s seven-year contract with Unilever, a deal valued at $1.1 billion. Arinso’s other payroll clients include General Motors Europe and Bank of America.

True to his nature, however, Sluys wants his own HRO deals. His goal: to make Arinso one of the top HR business process outsourcers serving global employers with up to 50,000 employees. The company hopes to double its headcount, revenue and HRO contracts in the next five years.

To do this, Arinso will have to balance its ambitious growth strategy with some level of restraint—a challenge that many HRO providers are confronting today, experts say.

As companies like Hewitt Associates struggle to absorb the business they have won, they are realizing that success in the market isn’t about being the biggest provider, analysts say. It’s about knowing what they do best, says Phil Fersht, an analyst at Everest Group, a Dallas-based sourcing advisor.

But as some of the larger HRO providers become more selective about what kinds of clients they sign on, there is an opportunity for Arinso to become a real player in HRO, analysts say.

And Arinso has already made inroads. The company has 15 HRO clients—representing 200,000 employees—that rely on it for a number of HR processes. One-third of the firm’s c176 million ($233 million) in revenue for 2005 came from its outsourcing business.

Analysts, however, aren’t convinced that Arinso has the resources to afford to absorb the upfront costs associated with bringing on global employers with as many as 50,000 employees.

"I think they would be better suited for employers with up to 10,000 employees," says Mark Hodges, founder of EquaTerra, a Houston-based sourcing advisor. The company simply doesn’t have the financial resources to handle the upfront costs of clients this size, he says.

For that reason, Arinso is a prime acquisition target. According to people familiar with discussions, the company has been approached by many of the large HRO providers, but Sluys’ price is too high.

When asked if he would ever sell, Sluys says, "Every company has a price. But our strategy is to continue to work on our own as long as our strategy works." He insists that Arinso doesn’t need "deep pockets" to meet its HRO goals because the company will be restrained in how many clients it takes on at a time.

"Any potential client that demands for me to have deeper pockets than I have, I will decline," he says.

Understanding its strengths Analysts often praise Arinso for not trying to take on too much as it has grown. In 1994, when Sluys was 31 years old, he founded Argus Integrated Solutions, now known as Arinso International. The company focused on SAP HR systems implementations for global clients like Royal Dutch Shell in the Netherlands.

The company slowly expanded its global presence to 26 countries to meet these clients’ needs. It also eventually broadened its offerings to include payroll services.

Arinso’s background in implementing SAP systems has given it insight into the corporate culture of Europe-based multinational companies, says Andrew Kris, chairman of the advisory board of Shared Xpertise, a European group dedicated to educating companies about outsourcing and shared services.

"And Arinso is the only indigenous European HRO provider," he says, "which means they understand the intricacies and cultures of the marketplace."

Because of the different languages, regulations and privacy laws in Europe, payroll is much more complex there than it is in the United States. Arinso saw its opportunity to address that market and become a leader early on, says Robert Brown, a research director at Gartner.

Given its history with SAP, which is by far the HR system of choice in Europe, Arinso has an edge there over ADP, its main competitor, analysts say.

Both Arinso and ADP offer global payroll platforms, but ADP’s relationship with SAP has only been operational for the past two years, says Mike Friend, research manager for European business services in the London office of IDC.

ADP, however, is gaining traction and today says it has 61 clients signed up for its GlobalView payroll and HRO platform.

Arinso executives argue that their main advantage over ADP is that Arinso will allow employers to run the payroll and HR systems within their own companies, thus keeping all the data in-house.

Analysts aren’t convinced that this is a selling point for many buyers. "One of the main reasons that organizations outsource their payroll is that they don’t want to maintain the system," Friend says.

Partnering Since Arinso has focused on payroll and SAP implementations, HRO providers tend to view the company more as a partner than as a competitor. They can’t say the same about ADP, Friend says. But Arinso may soon lose that image.

Arinso executives admit that partnering with HRO providers like ACS and Accenture has largely contributed to the company’s success. That doesn’t mean, however, that Arinso has any allegiances, says Rudy Vandenberghe, executive director at Arinso.

Arinso partnered with ACS in 2003 because it was seen as a leader in European HRO, he says. Under that deal, Arinso agreed to run payroll processing for ACS’ biggest European HRO client, GM Europe. At the time, the company estimated the deal with ACS was worth c90 million.

Arinso, however, didn’t want to limit itself to just one partner. And so the company kept a close eye on the front-runners in all the HRO requests for proposals. A couple of years ago, when Sluys and Vandenberghe heard rumblings that consumer goods giant Unilever was going to outsource its HR processes, they brainstormed about who would be the likely winner of the business.

"We knew that we were not going to be in the picture, so we went to speak to Accenture’s executives," Vandenberghe says.

Accenture had tried offering payroll on its own before for the city of Copenhagen, Denmark, a deal that came to an end in May 2005 with the termination of Accenture less than two years into a five-year contract.

Arinso met Accenture’s qualifications of having global payroll capabilities, while also having local subject matter experts in each of the countries, says Sian Bea­cham, European sales and solutions director for Accenture HR Services.

So in June 2006, when Uni­lever awarded a seven-year HRO contract to Accenture, Arinso won the job of providing payroll for Unilever’s 63,000 active and 12,000 inactive employees across 30 countries in Europe, Africa and the Asia-Pacific region.

For Arinso, the Accenture partnership paves a way for the company to get a piece of the large global HRO deals, Vandenberghe says. These deals all need global payroll, and Arinso can offer it.

But Arinso has no plans to sign an exclusive relationship with Accenture, Vandenberghe says. "If we do all the deals with one provider, we give that pro­vider too much bargaining power," he says.

Exclusivity isn’t important to Accenture either, says Christian Marchetti, managing director in the Paris office of Accenture. "You don’t win a deal as big as Uni­lever because of Arinso," he says.

In fact, Marchetti doesn’t rule out that at some point Accenture might build its own SAP-based payroll platform. In May, Accenture acquired Pecaso, a Heidelberg, Germany-based SAP consulting and implementation company that could someday become the basis of Accenture’s own payroll capabilities, he says.

"We need to have multiple options in mind," he says.

However, it doesn’t seem that Accenture plans to cut ties with Arinso anytime soon. In fact, the two companies just signed a service agreement in November. Arinso has accepted a pre-defined framework for what level of service it will provide Accenture in all of their deals together.

Analysts, meanwhile, wonder if Accenture will continue partnering with Arinso if the two start competing regularly for clients.

"As Arinso moves out of just payroll, it will be interesting to see how Accenture could continue to work with them," IDC’s Friend says.

And Arinso has begun to build its HRO capabilities. In April, the company acquired Lansdowne, a U.K.-based provider of recruitment services and technology. A few weeks later, Arinso announced a partnership with Jacksonville, Florida-based Vurv Technology for the use of its talent management software.

Its efforts appear to be paying off. Arinso recently won a five-year, $60 million HRO contract with CA Inc. under which Arinso will oversee HR administration for the computer networking provider’s 15,000 employees in North America, South America and Europe. Arinso partnered with CDI Corp. to provide recruitment process outsourcing. The deal does not include payroll. CA primarily chose Arinso for its SAP expertise, says Michelle Healy, a CA spokeswoman.

The deal gives Arinso more credibility in the HRO market, says Alan Hopwood, project director in the U.K. for EquaTerra.

Sluys admits that as Arinso continues to win HRO deals, managing its relationship with Accenture will prove to be "a fine balance." But it’s a necessary step.

Accenture’s Marchetti, for one, doesn’t consider Arinso to be a competitor.

"You can decide if you want to buy a Peugeot or Renault, but if you want to buy a motorbike or a car, you need to decide that first," he says. "I’m not saying that a motorbike is worse than a car, but it just has different capabilities."

Sticking points To be a true HRO provider, Arinso needs to establish a name and a strong presence in the United States—something that it has failed to do so far, analysts say. The CA deal may put Arinso on the map, but the company still has a ways to go in terms of brand recognition in the U.S., they say.

The U.S. is an integral HRO market, and Arinso has largely been an unknown in the states, says Gartner research director Brown. The company currently has five U.S.-based HRO clients.

Sluys concedes that Arinso has had difficulty developing its U.S. business, which it established in 1997. "There are many cultural challenges involved with a European company launching a U.S. business," he says.

These culture clashes are evident when looking at the turnover of Arinso’s U.S. management. The company has had four heads of its stateside business since it began operations.

Former employees who declined to be identified say that Sluys’ inclination to control and oversee every move of the U.S. business is one reason behind the turnover.

"Jos controls the company from top down. And that works in the company’s favor, but also acts as a handicap," Shared Xpertise’s Kris says. "On one hand, decisions are made very quickly and there are no turf wars. But on the other hand, there is no succession plan."

Sluys says he has micromanaged only when there’s been trouble. "If you don’t feel 100 percent comfortable with the leadership of an organization, you need to micromanage," he says.

As for succession planning, Sluys insists that there are three executives who could take over for him if need be, but he declined to name them

Arinso is back on track in America, and the CA deal demonstrates that, he says. Sluys maintains that Arinso has overcome its cultural challenges by installing Ignacio Palomera, who was regional manager for Southern Europe and Latin America, to oversee the U.S. business.

"Ignacio is practically U.S.-grown," Sluys says. "His family is Cuban and he lived in Florida before moving to Spain."

But Sluys’ European perception of U.S. grounding may be a bit different than an American one. Palomera did in fact live in Miami for a year as a child, but spent most of his childhood in Nicaragua and then Madrid.

Arinso does recognize the need to get some managers from the U.S. to oversee its business there, and hopes that as that business grows it can hire more people who fit this role, Vandenberghe says.

The company also anticipates reducing its costs by setting up a service center in Buenos Aires, Argentina. The center, which currently has 25 employees, focuses on call-center work and back-office transactions. Arinso hopes that by running these processes out of Buenos Aires, the costs for those services will be reduced by 50 percent, Palomera says. The Argentine capital was attractive because it’s in the same time zone as Atlanta, where the company’s U.S. headquarters is located. There is also a large talent pool there, Vandenberghe says.

"It might be a little bit more expensive than India, but we think we can maintain a more stable workforce there," he says.

Sluys and Vandenberghe both insist that turnover in the U.S. business has leveled off during the past year, but they wouldn’t provide numbers.

The other challenge facing Arinso in the U.S. is a formidable one: The company will be going head to head with ADP on its home turf.

Sluys maintains that by sticking to what it’s best at, Arinso can win over U.S.-based HRO providers. For that reason, the company insists on supporting only SAP and not other HR systems in the U.S. "That’s what we are best at," Sluys says.

Limiting his options for clients is not an issue, Sluys says. "The market is big enough for us to stick to what we know," he says.

How Arinso fares as it continues to juggle its multiple roles in HRO remains to be seen. But if Sluys has his way, Arinso will prove the ad­age that slow and steady wins the race.

"We can’t invest or lose millions of dollars a quarter like some of our competitors. We are just too small," he says. "We have to be pragmatic and see what niches we can win."